National expansion bid will test large SBA lender

Seacoast Commerce Banc Holdings in San Diego has been a big Small Business Administration lender in recent years — but it has plans to get even bigger.

The $939 million-asset parent of Seacoast Commerc Bank is setting its sights on reaching $400 million in annual SBA production in coming years, spurred by a nationwide expansion plan, said President and CEO Richard Sanborn. Such volume would represent a 45% increase over its originations during the SBA’s last fiscal year, which ended Sept. 30.

To that end, Seacoast recently hired Don Mercer as it national sales manager. In that role, Mercer is responsible for hiring roughly a dozen business development officers around the country.

“Our plan is for [Mercer] to take us to more of a national footprint,” Sanborn said. “We’re not looking to go into any particular states. … We want to find the right people and wherever they are, we’ll set up an office.”

Focusing on California and surrounding states, Seacoast has originated more than $250 million in 7(a) loans in each of SBA’s past three fiscal years.

The move is sure to accelerate loan growth, though it could also test the company's underwriting as the new lenders make more loans beyond the bank’s home turf. At Dec. 31, nonperforming assets totaled just 0.56% of total assets at Dec. 31.

Over the history of its 7(a) involvement, which includes more than 1,600 loans and $1.5 billion in originations, Seacoast has foreclosed on only five of those loans and, on a net basis, hasn't "lost a dime," Sanborn said.

Seacoast’s track record with credit quality is “phenomenal” said Bob Coleman, publisher of the Coleman Report, a prominent newsletter for small-business lenders, adding that a nationwide expansion should pose little risk “if managed prudently.”

Seacoast believes it can manage risk. For starters, the company confines its 7(a) lending to credits backed by real estate, Sanborn said.

“We don’t do anything unsecured,” he said. “We don’t do working capital. We don’t do equipment. We don’t do business acquisition. [Everything] we do is first-lien, real-estate secured.”

While the narrow scope may appear self-limiting to some observers, it provides an ideal springboard for nationwide expansion, Sanborn said.

“We’re basically a manufacturing company,” he said. “It’s the same product, the same process, the same underwriting. … From that standpoint, going to a national platform isn't going to change our back office at all.”

Having quality borrowers has helped, too.

“These are small business owners,” Sanborn said. “Their businesses are their lives. They’ll let their houses go, because if they have to they can live in their buildings. … They’re committed to making their businesses work, so they make their payments.”

Still, competition for 7(a) loans will be intense. The expansion comes at a time when the 7(a) program keeps drawing more interest. Fiscal-year 2018 originations through Jan. 26 are up 17% from a year earlier, to $8.7 billion.

“A lot of lenders are gearing up” for more growth, Coleman said. “The 7(a) program has grown 67% in the past seven years — and it’s not showing any signs of slowing.”

Seacoast, more than most banks, has hitched its fortunes to 7(a) lending; SBA credits make up about half of its $776 million loan portfolio, excluding loans sold on the secondary market.

While Seacoast’s recent $54 million purchase of Capital Bank in San Juan Capistrano, Calif., provided access to new businesses such as specialty real estate development, the deal also added $150 million in SBA lending capacity.

“If we could hold every single 7(a) loan we produce, we would do that,” Sanborn said. Keeping a 7(a) loan on its books is much more profitable than selling one, he said.

Profits at Seacoast have increased from just $1 million in 2013 to $8.1 million last year, excluding one-time costs tied to the Capital acquisition and a write-down of the company’s deferred tax asset following the passage of tax reform legislation.

If Seacoast’s plan lives up to expectations, it will likely make the company a more tempting takeover target, but that doesn’t bother Sanborn.

“We want to be able to grow a franchise and have something of tremendous value,” he said.

“At some point, someone is going to make us an offer and they’re going to buy us," he added. "That just seems to be what happens in community banking. We need to build our bank in a way that we believe is going to provide the most value to shareholders down the road.”

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